CPI Report Throws a Wet Blanket on Mag-7 Stock Rally Hopes!

The last thing career politicians need in an election year is an inflation print that doesn’t support the “mission accomplished” narrative. The Bureau of Labor Statistics (BLS) can only massage and suppress the data for so long, and as inflation rears its ugly head, the you-know-what is about to hit the fan.

Suffice it to say that this wasn’t the inflation report the government fat cats and stock market perma-bulls were looking for. They didn’t just want a home run in February’s Consumer Price Index (CPI) report – they needed a grand slam since mega-cap stocks had already priced in declining inflation and subsequent interest rate cuts.

What they actually got was a major letdown. As it turns out, February’s CPI grew 3.2%year-over-year, meaning that it was higher than the economists’ forecast of 3.1%. In addition, this result for February came in higher than January’s 3.1% CPI growth, so consumer prices are actually increasing instead of cooling down.

The perma-bulls will sometimes overlook the headline CPI print if it doesn’t fit their narrative and will instead focus on “core” CPI. This excludes food and gasoline prices even though these are two of the most important categories of products for middle-class American consumers.

In any case, the so-called “core” CPI print didn’t provide any confidence, either. For February, the “core” CPI grew 3.8% year-over-year while economists had expected to see a 3.7% annual gain.

Why is this all so important? It’s because this CPI report was the last chance for the Federal Reserve to get some favorable data before the upcoming FOMC meeting on March 20. The market didn’t get the interest rate cut they hoped for in the late January FOMC meeting, so mega-cap stock investors then pinned their hopes on a March rate cut.

Fed policymakers, including Chairman Jerome Powell, have warned that they want to be sure inflation is easing before they start to bring interest rates down. This February CPI reading wasn’t red-hot, but it shows that inflation is running hotter than expected and is more persistent than the government admits.

Of course, hardworking middle-class Americans haven’t felt any easing of inflation pressures even if politicians want to declare victory. The disconnect between Wall Street and Main Street is more evident than ever as mega-cap stocks continue to march higher despite consumers’ ongoing struggles.

If the stock market doesn’t reflect the reality of Main Street, it’s not because all 500 companies in the S&P 500 are posting blockbuster earnings. Remember that the S&P 500 is weighted by market cap, which allows a handful of companies to dominate the index.

For a while, it was the so-called “Magnificent Seven” mega-cap technology stocks that controlled the S&P 500 and NASDAQ indices. Lately, though, these indices are even more concentrated since it’s mainly just NVIDIA, Meta Platforms, and Microsoft pulling the S&P 500 and NASDAQ higher.

This begs the question of how much more room these few “magnificent” companies have to grow. NVIDIA’s trailing 12-month P/E ratio is now up to 71.9x, and the company’s price-to-sales (P/S) ratio is an eyebrow-raising 34.76x (anything over 3x is already getting into overvalued territory).

Meanwhile, the market is jumping for joy because Meta Platforms actually paid its investors a dividend. Don’t expect to get rich from Meta Platforms’ stock, though, because the annualized dividend yield amounts to a paltry 0.5%.

93% Of Investors Generate Annual Returns, Which Barely Beat Inflation.

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    In other words, the market will use any opportunity to push up “Mag-7” stock prices right now despite their lofty valuations. Today, even though the CPI report suggested that sticky inflation will force the Fed to continue the “higher for longer” interest rate policy, the NASDAQ stayed green because Oracle posted an earnings beat.

    Oracle isn’t even a Magnificent Seven company, but Oracle’s management promised a joint announcement with NVIDIA in the coming weeks. So, this was enough of an excuse to keep tech stock traders in a buying mood for another day.

    Gold slipped since short-term traders felt the need to pile into Big Tech, but the big picture hasn’t changed. It was inevitable that gold would pull back somewhat after its impressive rally to $2,200 the past couple of weeks.

    Seasoned investors understand the correlation between dollar debasement and the gold price. Persistent dollar inflation is a net positive for gold in the long term, but short-term traders can manipulate the price for brief periods of time.

    There’s also been some portfolio reallocation from gold to Bitcoin. Both assets are inflation-resistant, but Bitcoin’s been getting the lion’s share of mainstream media attention. This is to be expected because Bitcoin is much more volatile than gold, and its more extreme price moves make for great financial media headlines.

    What the media won’t tell you is that it’s fine to own some gold and some Bitcoin because they’re both anti-inflationary and free from government interference. However, since gold is tangible and Bitcoin isn’t, gold is particularly compelling for investors who want to literally hold what they own.

    The fact is that gold and Bitcoin are both in an uptrend, and you can thank the government’s penchant for printing money. While rising inflation is a terrible detriment to America, at least there are ways for forward-thinking investors to brace for the unfortunate impact.

    Prosperous Regards,
    Kenneth Ameduri
    Chief Editor, CrushTheStreet.com

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